Everyone who earns a living, or earns income, has to pay in their share of social security and Medicare taxes. For most of us, this is done by our employer where our share is paid in from our paycheck. Now for some of us, this is handled very differently; this is the case for self-employed individuals, or Schedule C filers. For self-employed individuals, their share of social security and Medicare gets calculated on their net income/profit on the schedule C. This calculation and the tax about is shown directly on the Schedule C and is called self-employment tax.
The self-employment tax is 15.3 % of the total net income for the business. When filling the tax return, a cred if 7.65 % is applied against the self-employment tax, leaving and amount due of 7.65% of the total net income. This amount due makes up the self-employed person’s share of social security and Medicare. This amount needs to be taken into consideration during the tax year, and deposits need to be set by the individual to cover the tax liability at the end of the year. The self-employed need to avoid any large tax liability stemming from the calculation of self-employment tax in order to not be assessed any penalties by the IRS.
If you are self-employed business owner, a schedule c filer, you should contact your accounting services or tax preparation provider to discuss some tax planning that takes into account the liability produced by the self-employment tax. They should be able to help plan for the tax liability by helping make sure all your expenses are properly applied, making sure depreciation/ amortizations is properly recorded, helping discuss any IRS contributions and discussing amounts of estimated tax needed to be deposited each quarter. Use those providers and heed their advice in order to avoid any issues with the self-employment tax.
One question heard often from self-employment business owner is why is there self-employment tax? It is to make sure that any excess income for the business through the schedule C is taxes at a rate equivalent to the share of a employee’s social security and Medicare tax. This action ensures to properly track any social security tax owned and applied to small business owner’s record. The good news is there is a credit for the other portion of this tax on the individual’s return to avoid any duplication of tax liability.